While many in the market are probably not even aware that the VIX Index has closed below $10.00, the measure of the market’s expectation for 30-day implied volatility for the underlying SPX Index has dipped below the $10.00 level on nine occasions, or 0.15% of the time, since January 1990 when VIX Index data is readily available.

data sources: CFE, Yahoo Finance and Differential Research LLC

Since 1990, these extreme levels for the “fear gauge” have occurred during two distinct low volatility periods.

data sources: CFE, Yahoo Finance and Differential Research LLC

The first period from December 1993 to January 1994 included 5 trading days where the VIX closed with a $9.00 handle including the index’s lowest reading of $9.31.

data sources: CFE, Yahoo Finance and Differential Research LLC

The second and more recent period includes 4 VIX closes below $10.00 between November 2006 and January 2007. The last single-digit reading of $9.89 occurred on January 24, 2007 just weeks before the first tremors of the 2007 – 2008 “financial crisis”.

data sources: CFE, Yahoo Finance and Differential Research LLC

Notably, both periods of single-digit VIX closes seem to have two characteristics in common, characteristics which arguable are in place today.

The first has to do with the calendar. Both periods of single-digit VIX closes took place over the November – January period or roughly over the winter holidays. While we look at the past twenty trading days to calculate realized volatility for what is approximately a monthly period, we look at 30 calendar days forward to calculate a month’s worth of implied volatility. The winter holiday period includes four extra-holidays, three of which occur within a thirty day period. The exchanges also close early the day after Thanksgiving and on Christmas Eve.

The second common factor is very low SPX 20-day Realized Volatility readings. In 1993 realized SPX volatility hit a low of 4.97% on December 23rd having spent much of the year in single-digits. Likewise SPX realized volatility remained below 10% for most of 2006 with the lowest readings near 6.00%

So where are we now?

data sources: CFE, Yahoo Finance and Differential Research LLC

Well we are heading into the holidays.

Thanksgiving Friday November 29 2013 – early close

Thanksgiving Day November 28, 2013 – exchange holiday

Christmas Eve December 24, 2013 – early close

Christmas Day December 25, 2013 – exchange holiday

New Year’s Day January 1, 2014 – exchange holiday

Martin Luther King’s Day January 20, 2014 – exchange holiday

Likewise SPX 20-day realized volatility has remained below 10% for much of the year with readings in the 6% range as recently as August.

If we are going record a single-digit VIX close it will require the SPX to close virtually unchanged (or slightly positive) several days in a row but could occur between Thanksgiving and Christmas.

Finally, I will be teaching a two-day course “Trading Volatility” in London December 5th and 6th and have limited availability to meet in London on December 4th. Let me know if you would like to meet me in London. Click the link for details.

data sources: CFE, Yahoo Finance and Differential Research LLC

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+ Negative Correlation of Asset Returns and Asset Volatility
+ At the Money volatility and the First VIX – a portion of the surface
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+ The “New” VIX calculation – the publicly traded slice